US president has given his nod for the new tariffs on the import of steel and aluminum. What will be impact of the tariffs? Are they good or bad for the US & the world? You will find now.
How Good is the Timing?
US steel and aluminum industries have been bleeding due to cheap imports. The industries are suffering due to low production and loss of jobs.
The commerce department found that employment in the domestic steel industry has gone down by 35 present in past two decades. The aluminum industry lost nearly 60 percent of jobs between 2013 and 2016.
How Cheap Imports are Consuming Domestic Producers
The United States imports steel from more than 100 nations. Import is four times more than the exports.
China has the capacity to sell steel and aluminum in the US below the cost of domestic production. Pricing competition has negatively impacted the job creation.
Trump Fulfils His Promise
Trump won the elections by promising he will be tough on steel imports. This promise helped him win the support of blue-collar voters in Midwestern states. Now he is doing what he promised.
Impact On Global Trading Partners
Trump’s decision of hiking import taxes of steel and aluminum has attracted worldwide reaction.
The Director-General (DG) of World Trade Organization (WTO) has warned trade war could lead to a deep recession.
Roberto Azevedo, the DG of WTO, told negotiators in Geneva “Once we start down this path it will be very difficult to reverse direction. An eye for an eye will leave us all blind and the world in a deep recession.”
Not just WTO but the IMF (International Monetary Fund) also has condemned the import tariffs.
European Union has hinted at a tit for tat reaction for the import duties. According to the president of the European Commission (EC), Levi jeans, Harley-Davidson motorbikes and bourbon whiskey can all face import tariffs. The list is set to grow further.
Canada has cautioned that additional tax would cause a commotion on both sides of the border.
According to China’s National People’s Congress spokesperson Zhang Yesui, “some friction will exist” between the US and China.
The statement by Zhang Yesui is significant because of the huge trade volume that exists between US and China. Below are the numbers from the office of the US Trade Representative.
2016 Goods Trade Between US and China
|Total Volume||Export (From US)||Import (To US)|
|$578.2 Bn||$115.6 Bn||$462.6 Bn|
View of the Trump Administration
The administration feels the effect import duties is overblown. The raw material cost is not significant compared to the production costs of cars, machinery, beverage cans, etc. For example, you may know aluminum is used to make beverage cans. A 10% increment on aluminum would mean just a cent-and-a-half increase in the price of a six-pack of beer, according to White House trade adviser Peter Navarro.
Jobs are Being Created Again
The U.S. Steel has proposed to restart one of two idled blast furnaces in the Granite City. Due to the move, 500 laid-off workers will get back the jobs.
Century Aluminum Company plans to hire 300 additional workers for the smelter in Hawesville. The firm plans to invest $100 million. Other factors like increased growth could have contributed to the company’s decision.
Impact on Stock Markets
The steel and aluminum policy has started a potential trade war. Now foreign steel and aluminum makers will pass on the additional tax to the US manufacturers. The manufacturers will have two options. They will purchase at higher prices from the foreign suppliers or will switch to domestic producers. Either way, the production costs will rise.
The production costs of goods that depend upon steel and aluminum will suffer. Some impacted products will be cars, planes, beverage cans, boats, etc. The costs will affect future growth and equity valuation.
US inflation is on the rise. As of January 2018, the 12-month inflation stood at 2.1%. Federal Reserve is hinting at increasing rates in the near future. The increased costs of goods due to import duties will add to the inflation worries
Higher costs and potential higher rates will hurt the stocks of automakers and machinery companies. Economic activities and corporate earnings may suffer.
Investors Shifting Focus to Small & Mid Caps
The US investors are concerned about large caps with international exposure. These are the first targets in case of a trade war. Hence, a lot of buying is happening in small and mid- caps.
In the 7 days starting from March 1, 2018, the performance of small, mid and large caps is shown below. (We have used popular representative indexes).
|Indexes||March 1||March 8||Percentage|
|Russel 2000 (Small Cap)||1507.38||1571.96||4.28%|
|S&P 400 (Mid Cap)||1858.09||1917.63||3.2%|
|S&P 500 (Large Cap)||2677.67||2738.97||2.28%|
Based on the above data, small caps have grown most, followed by mid and large caps.
Summary: Impact of Tariffs
Trump administration feels that the tariffs are the need of the hour. But the plan may cost American corporations in case the importers from the US reciprocate. Hopefully, some balance will be reached between America and the trading partners. Let’s hope things turn out good for the US and the rest of the world.